Budget 2022 Expectations: Bring uniformity in taxation on listed Debt Securities and Debt Funds

While the minimum holding period for debt funds (listed or unlisted) to qualify as long-term capital asset is 36 months, that of direct investments in listed securities is only 12 months.

Budget 2022 Expectations, Union Budget 2022-23, listed Debt Securities, debt mutual fund, bonds, debentures, Government Securities, derivatives, Zero Coupon Bonds, long-term capital gain, LTCG, Mutual Funds Association of India, AMFI
AMFI has urged the government to bring parity in tax treatment among debt-oriented mutual fund schemes and the listed debt securities.

As there is a discrepancy in tax treatment between the units of debt-oriented mutual fund (MF) schemes and the listed debt securities – while the minimum holding period for debt funds (listed or unlisted) to qualify as long-term capital asset is 36 months, that of direct investments in listed securities such as bonds/debentures, Government Securities, derivatives, etc. listed on a recognised stock exchange in India and Zero Coupon Bonds (listed or unlisted) is only 12 months – the Mutual Funds Association of India (AMFI) has urged the government to bring parity among the two sets of instruments.

This is because, after making a direct investment in a listed debenture, an investor needs to wait for just 12 months to get the benefit of long-term capital gain (LTCG) tax, while an investor needs to wait for 36 months to avail the benefit of LTCG tax after investing in the units of debt-oriented MF schemes.

In other words, the holding period for direct investment in a listed debenture to be treated as long term investment for capital gain tax purposes is 12 months; whereas, if the same investment is made through a Debt-oriented Mutual Fund scheme, the period of holding is increased to 36 months to be regarded as long-term investment for capital gain tax purposes, which is ironical.

So, bringing parity in holding periods for capital gains tax purposes for direct investment in listed debt instruments and investment in such listed debt instruments through debt-oriented mutual fund schemes, would be a logical and fair move.

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To bring the parity in the holding period for long term capital gains for direct investment in listed debt securities / and Zero-Coupon Bonds (listed or unlisted) and for investment through debt mutual funds, AMFI has urged to bring the well-deserved uniformity either by –

(i) reducing the holding period for long term capital gains for the investments in non-equity oriented mutual fund schemes, which invest 65 per cent or more in listed debt securities, to 12 months; or

(ii) by increasing the minimum holding period for direct investment in listed debt securities / and Zero-Coupon Bonds (listed or unlisted) to 36 months to qualify as long-term capital asset.

According to the statement containing its Budget expectations for the financial year 2022-23, AMFI said, “It is only logical and fair to bring parity in tax treatment for direct investment in listed debt securities and indirect investment in the same instruments through debt-oriented mutual fund schemes.”

“This parity between direct investments in a listed security (by corporates & HNIs) and indirect investments made through mutual funds by retail investors would also prevent tax revenue leakage,” AMFI further said in the statement.

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